Choosing the Right Financial Vehicle
The first choice of vehicle for most people is working for someone else.
Let’s examine the fallacy of gaining financial freedom through being an employee. There are many reasons why a person makes this choice.
First, many times it is because someone in their family before them has worked at the same location, in the same vocation, or with the same company. Thus, they believe it is a noble thing to follow in the footsteps of their family member.
While this may be noble, it is not smart financially. Second, many people do not have the education or expertise to do anything other than work for someone else.
It is not wrong for a person to labor for someone else; in fact, there is always a need for laborers. However, this is not a vehicle by which financial freedom can be gained.
The employee or laborer, let’s call him Lem, will always be dependent upon the employer for one thing, his employer’s willingness to pay. As soon as the employer is unwilling or unable to pay, Lem is without an income. This dependence is a scary thing, and it is getting even scarier.
Through the years, people have had to compete for the best paying jobs. This was no different for Lem. He had to acquire more education, more skills, more recognition, or more connections to position himself for that high-paying job; all the while spending thousands of dollars to acquire those requirements of “positioning.”
What he did not realize is that he was only indebting himself so much that it will take decades to even break even with what it cost him. By then, the younger, more able, more skillful, more educated, and more connected is now in competition for his job.
If Lem has not been promoted into higher positions of authority, he is a “sitting duck” for the competition. All of the sudden Lem finds himself with the prospect of being replaced, and the decades of service were only useful in his life to pay for the “cost of positioning.”
He is not able to enjoy the security he once thought was a sure thing. He is now in the mid-life years and having to compete with younger more energetic individuals for the same job. He is not financially secure because the past ten or fifteen years have been paying for his cost of positioning.
Even if he has been promoted, he is still competing with others for the ever-illusive position “that will guarantee security.”
Lem’s dream of financial freedom quickly becomes a nightmare. He does not possess financial freedom, personal freedom, or any other freedom, because he is told when to go to work, when he can leave work, when he can go on vacation, how long he can stay on vacation, how much money he is going to make, and for how long he is going to make it.
He is told where he has to work, who he must work with, and who he must work for. Since he is trading his time for this control by his employer, and therefore, his time freedom, he is quite literally giving up everything just to work for someone else.
This is not what he had envisioned when he was in college preparing for his career.
Lem had a vision of being financial free some day, at retirement age, but never recognized what he was giving up in the best years of his life. If he could have recognized when he was younger that the only way to true financial freedom is to be free to make his own choices, it would have empowered him to make the choices that would take him to his goal faster than he could have ever dreamed possible.
The dream of financial freedom, however, is not held by everyone. There are those individuals that choose to work all their life for someone else. For them, financial freedom will never be a reality. They have accepted a certain level of quality of life as being sufficient for them. To them I say, “More power to you!”
I would not want to reduce their choice to anything other than it being their choice. If they are happy with this arrangement, then who am I to say otherwise?
There is, however, a large segment of our society who desires to live their life to its fullest possible extent.
They desire to have the ability to go where they please, when they please.
They want to choose for themselves who they work with, and desire to work for no one.
They have an appetite for a higher quality of life than the average person.
They are willing to risk more to have more.
They are willing to pay the price now, for a few short years, in order to enjoy the life they desire for many years to come.
They enjoy and must have financial, personal, and time freedom.
They are the givers of the world.
They recognize that the only way to enjoy this kind of life is to give themselves to others, and thereby proving that it is more blessed to give than to receive.
It is this group of people that provide the employment opportunities to most other people.
This group of people also gives a large portion of their earnings to non-profit endeavors.
It is also this group who generates more tax revenue for the government through commerce.
The vehicle chosen by this group to reach financial freedom is business ownership.
The reason is simple; as a business owner, this person, and we will call him Shem, has the ability to determine how much money he will make, as apposed to the employee who has this determined for him.
Shem has the opportunity, as a business owner, to make decisions that directly affect how much freedom he will have. Shem can decide what line of work he wants to pursue, and how much he wants to be paid. He decides how many hours he wants to work, and when he works those hours.
Shem decides when he goes on vacation, and how long he wants to enjoy the vacation. The only limit Shem has is the limitations he places on himself.
What are the differences in Lem and Shem when it comes to finances and financial freedom?…
The most obvious difference between the two is: while Shem makes a profit, Lem only makes a wage. These two different approaches to income creates polar opposite results in personal finances.
While both can be considered an income, only profits from business retain the larger portion of the earnings. As stated in my book, “Don’t Get Trampled by the Moose!” “An employee is taxed on his wages while a small business owner pays taxes on his profits.” This means that Lem must pay the government all their money before he sees his paycheck, while Shem pays his expenses before he gives the government anything.
In some cases, Lem may actually pay the government more than he is supposed to and feel he is getting something great when the government returns the overpayment to him in April of each year in the form of a tax return.
This arrangement takes money out of Lem’s pocket during the year that he could be investing or using for expenses, and allows the government to use it instead. Lem is not in control of his finances because other people are deciding what is done for him.
Lem has one of the rarest and most precious commodities any of us have, and he’s trading it for one of the least valuable commodities. He is trading his time for someone else’s money.
Time can never be saved or created. We all have the same amount of time in a day. When time has passed, we can never regain that time. It is imperative that we all use our time as wisely as possible!
Money, on the other hand, is not rare; you can save, create, regain, manipulate, and generate as much money as you desire. It is not even worth that much any more, and they print or mint more of it all the time.
The truth is, Lem is getting the raw end of the deal. He is told what, when, where, and how he is to live more than one half of the available hours in his day. In return he is receiving just enough money to pay his bills and have a little left over for a movie or to eat out once a week.
Lem can never make more money than the number of hours he works, thus, his income is very limited, and so is his future. The only way he can increase his income is to work more hours. The only way he can change his economic status is to find another legal source of income, reduce his expenses, or both.
Shem is the one in control of his money, and consequently, his financial future. He has tax advantages that Lem hasn’t even heard of; much less have the opportunity to enjoy.
Shem can reduce his tax burden dramatically by claiming over 150 tax deductions as a small business owner. As an officer of his company, Shem also gets to pay for many personal expenses such as: children’s college education, vacations corresponding with business trips, housing, etc, all out of the company’s revenues, and not having to pay a penny of income tax on those items.
This reduces the taxable income necessary for Shem to enjoy these benefits and a greater quality of life, while Lem must figure out how to save for or do without these opportunities. The tax incentives alone are motivation enough for Lem to start a small or home-based business.
Add to this the freedom Shem enjoys to live life on his terms, and you can see why Lem is angry. He has been sold a bill of goods that is not what he bargained for. Lem was looking for something much different than that with which he wound up.
The question now is, “How can Lem get out of this predicament?” He must change the vehicle, which he is counting on, to gain the financial freedom he desires. His current vehicle, or plan, is not working, so he must choose another vehicle to provide the freedom he desires. Place yourself in Lem’s shoes.
It is important for you to make this choice wisely because you do not have as much time left as you once did. Therefore, the particular vehicle you choose must get you to the desired “end” faster than the ones you would have chosen when you were younger. It is also very important to select the right vehicle for the economic environment in which you live.
Some financial vehicles may seem to be great opportunities at first, but turn out to be just the opposite, causing you to waste precious time getting to your financial goal. You must determine the effectiveness of your current choice of vehicle, and select a second vehicle that will supplement your income in the short term, and perhaps even replace it in the long term.
To effectively make this choice, you must first decide whether or not you even have a plan to reach your financial goals. Once you recognize what level of income is needed to reach your goals, the business vehicle you will choose to carry you to the “end” is of utmost importance.
There are only three types of basic business models to choose from: a conventional brick-and-mortar business, a franchise business, or a home-based business? To determine which one is right for you, the activities of the business must coincide with your purpose for having the business in the first place. In other words, the business model should match your desired goals.
If your goal is financial, time, and personal freedom, you don’t want a business that ties you to activities that are not in line with your goals. Let’s look at these three in comparison one with another.
First, let’s look at the conventional brick-and-mortar business. The critical elements of this type of business is, location, location, location (as it has been overstated, but still true), a trend friendly product line, a lot of personal time on site, and lots of working capitol (and I mean lots).
In a typical conventional business, you would build and own a building, buy an existing building, or lease an existing building. If you build a building you also must also purchase the land on which the building will sit; if it is in the right location, you must purchase a very expensive piece of property if it is going to draw traffic through your doors.
Without traffic, you have no business. In this business model, there are several factors that will affect how well suited it is for your goals. You must ask yourself these questions:
- Do you have the capital to initiate this type of endeavor?
- Do you have the personal time to invest into running this type of business?
- Do you have the products or services that people want?
- Can this business get you to your goal quickly enough?
If you answer no to any of these questions, you best not begin this type of business. Because this type of business is commonly very labor intensive, you will not have the freedom you may think you will have.
There is the option of paying other people to work for you, and this is a good thing for the economy, however, until you have sufficient income to cover all the financial obligations placed upon an employer by the government, you are going to be the “chief cook and bottle washer.” This is OK as long as you can answer yes to all the above questions.
Second choice of vehicles is the franchise business.
This type of business closely resembles the conventional brick-and-mortar business except that your products or services are already established for you. There are advantages the franchise business has over the conventional business. These advantages would typically include:
1. National recognition 2. A proven system for you to follow
3. Standardized products and services
4. Established business model
While this type of business usually generates a higher income to investment ratio, the downside to this kind of business is that it normally requires a substantial initial investment. Most franchise businesses must also share a percentage of the gross or net revenues with the parent company.
In other words, since I enjoy eating at a fast-food restaurant called Wendy’s, let’s say I wanted to open a Wendy’s restaurant and was successful in doing so. In return for the privilege of using the Wendy’s name, I would have to share a percentage of the revenue of the franchise with the Wendy’s franchise corporation.
The owner of this type of business must dedicate himself to the life of the business.
In other words, as long as he owns the franchise he will be tied to a schedule that includes very long hours and all the headaches that go along with hiring and firing employees.
Thirdly, we discuss the vehicle option of the home-based business.
There are many different options for the home-based business owner in regard to the type of business, the business model, the product or services, and the initial investment requirement.
The most common home-based business is network marketing. Network marketing is one of the fastest growing industries in the world. A recent article in the USA Today, Business section, promoted network marketing as being a recession proof business. Well known business men such as Donald Trump, Robert Kiyosaki, Sir Richard Branson, and others have not only encouraged participation in this industry, but have invested heavily in the industry themselves.
There is a reason for this. http://www.fortunesocial.com
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